Strategy and Culture: What investors need to know

Sustainable finance continues to move towards the mainstream, and this is fantastic to see.

That said, the best work in most disciplines is often under acknowledged or not always obvious and on the surface for all to see. This same trend emerges with sustainable investing and ESG data, especially when investors take simple approaches that don't focus on the bottom line and don't be surprised, then, if they fail to outperform financially, sending an unfortunate and unnecessary signal to the market that sustainable investing can come with a cost - it doesn't have to.

Investors also at times fail to meet a high bar minimum standard of impact, as our certified community of fund managers have achieved (we estimate only 5-10% of fund managers qualify). That said, the consistently strong financial performance of fundamentals focused active managers such as Generation and Stewart Investors are just two examples that merit further consideration.

Few funds can boast the performance numbers of London’s Generation Investment Management, which has developed its own successful, financially outperforming, active approach to sustainable investing since its founding in 2004. Their core equity fund regularly post 5-year returns around 18%, justifying their relatively high fee structure. This is all the more impressive in an era where most active managers struggle to meet benchmarks. Other firms that take similar ‘enhanced green fundamentals’ approaches, such as Scotland’s Stewart Investors, also post similar performance strength.

But what exactly is an ‘enhanced green fundamentals approach?’

Enhanced green fundamentals add considerations of culture and strategy to existing fundamentals research, and this can and should apply not only to public companies, put privately run organizations as well including state owned enterprises.

On strategy, Generation, for example, first takes a thematic assessment of large global challenges. Climate change, access to clean water, healthcare and similar issues; they regularly liaise with a panel of experts to update priority issues seasonally then look for big picture solutions that can meet those challenges. This big picture approach leads to a short list of global companies for further attention where corporate strategies align. For example: Low-carbon urbanization? Look for sustainable construction materials companies.

After finding focal points, they focus deeply on culture. Interviews with company management, employees, and customers. Reviews from suppliers. Compensation incentives. Governance structures. Companies are people, and the best companies are where people put forth their best work. This requires adept management, trust, and a purposeful vision that inspires. Each company receives a score, which is considered side by side with traditional financial fundamentals.

Why does this work so well?

The basic premise that good companies do well may seem obvious, but the execution from a fund manager perspective isn’t straightforward. Assessing corporate culture is, ultimately, difficult and comes with a cost as a result, but this cost could be shared more broadly across investors and minimized as a result. Both macro and micro perspectives can be equally important, and maintaining buy/sell disciplines that act on such research is key. All such deep research takes many hours for each prospective investment. But as a reward for hard work, managers can uncover market inefficiencies to gain alpha, as Generation and Stewart have experienced to the benefit of their investors.

These challenges help explain why this approach has remained somewhat limited in assets under management. Generation has a long waiting list of asset owners seeking to give them more money, as they have capped the amount of assets their core strategy will accept but there are other ways to scale their approach.

Generation and other managers increasingly take a similar approach with private companies, and when enough investors assess strategy and culture directly, companies improve, as does financial performance, and this approach is largely just getting started in Asia, which is half the world's economy already by some measures.

So, we’d like to help. If we can help facilitate a better understanding of the connections between strategy, culture and financial performance, we believe more investors can help create a positive dynamic at scale.

We’re particularly interested in Asian markets, such as China, where this approach works well, perhaps especially given a lack of reliable ESG data, but we also believe strategy and culture are universal factors worth understanding.

As an example, we’ve created a Real Insights report as can be found at the link below, assessing the strategy and culture of a prominent Chinese company attempting to assist the low carbon transition through the manufacturing of electric vehicles, Great Wall Auto.

This profile does not emphasize non-decision useful metrics or rehashed news items. Rather, the focus is on company management, corporate culture and whether their strategy is positioned for success in the light of sustainability and financial trends. Critical for success after all is whether a company can achieve its desired impact which requires that the company not fail financially rather thrive and deliver its better impact through increased sales of its better products and so on.

Download our sample profile here on China’s Great Wall Auto.

At the end of the day, we all really should want to know on a forward looking basis who has 1) the right business strategy, 2) the best culture (including governance and stakeholder interaction) and 3) a business case with room to grow.

Companies and investors can achieve to these three factors, creating the sort of positive dynamic that can tip financial markets in general in a better direction.

When enough investors influence corporate strategy directly, companies improve, as does financial performance.

Let’s not just leave ‘the good sustainable stuff’ to a few connoisseurs. We believe this can and should be the future of all investing.